9 Operating Decisions....................................
This chapter introduces the operations function through the value chain and
contrasts the different operating decisions faced by manufacturing and service
businesses. Operational decisions are considered, in particular capacity utiliza-
tion, the cost of spare capacity and the product/service mix under capacity
constraints. Relevant costs are considered in relation to the make versus buy
decision, equipment replacement and the relevant cost of materials. Other costing
approaches such as lifecycle, target and kaizen costing and the cost of quality are
also introduced.
The operations function
Operations is the function that produces the goods or services to satisfy demand
from customers. This function, interpreted broadly, includes all aspects of pur-
chasing, manufacturing, distribution and logistics, whatever those may be called
in particular industries. While purchasing and logistics may be common to all
industries, manufacturing will only be relevant to a manufacturing business. There
will also be different emphases such as distribution for a retail business and the
separation of ‘front office’ (or customer-facing) functions from ‘back office’ (or
support) functions for a financial institution.
Irrespective of whether the business is in manufacturing, retailing or services,
we can consideroperationsas the all-encompassing processes thatproducethe
goods or services that satisfy customer demand. In simple terms, operations is
concerned with the conversion process between resources (materials, facilities
and equipment, people etc.) and the products/services that are sold to customers.
There are four aspects of the operations function: quality, speed, dependability and
flexibility (Slacket al., 1995). Each of these has cost implications and the lower the
cost of producing goods and services, the lower can be the price to the customer.
Lower prices tend to increase volume, leading to economies of scale such that
profits should increase (as we saw in Chapter 8).
A useful analytical tool for understanding the conversion process is thevalue
chaindeveloped by Porter (1985) and shown in Figure 9.1. According to Porter
every business is:
a collection of activities that are performed to design, produce, market,
deliver, and support its product...A firm’s value chain and the way it